Feds propose rule that would ban noncompete clauses

The Federal Trade Commission is proposing a new rule that would prevent employers from imposing noncompete clauses for workers. These types of arrangements, long criticized by progressives and some free-market proponents, typically keep a workers from joining a competitor for some period of time after they leave the company.

President Biden praised the proposed rule, calling it "a huge step forward." The FTC's move follows an executive order he signed in 2021 targeting anticompetitive practices in technology, health care and other parts of the economy. The order included a call for banning or limiting noncompete agreements to help boost wages.

"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," FTC Chair Lina Khan said in a statement. "Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand."

The proposed rule would make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker, or to represent to a worker, under certain circumstances, that they are subject to a noncompete. The rule also invalidates existing noncompete agreements.

"This is a blockbuster development in the employment world," said Peter Rahbar, a New York employment attorney who has represented employers as well as workers.

Disliked, but common

Noncompete agreements have become increasingly common in the workplace. One estimate by the left-leaning Economic Policy Institute found that a third of companies require all their workers to sign noncompetes — including many hourly workers in low-paid jobs like cleaning, food service and security. 

States have started to regulate noncompetes by limiting what workers can sign them or requiring companies to pay more to ask for a noncompete, and studies have shown that states that limit these restrictive agreements see workers' wages rise afterwards.

Progressives in Congress lauded the proposed rule, caling it a "major pro-worker move."

The proposed rule comes a day after the FTC settled with three companies that required their workers to sign noncompetes, including a security company based in Michigan that threatened minimum-wage guards with a $100,000 penalty if they took a job with a competitor.  

The FTC estimates that the new rule could boost wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.

Still, the rule is likely to be challenged in the courts, with the U.S. Chamber of Commerce calling it "blatantly unlawful."

"The scope of this overreach by the FTC on non-competes -- legally and in terms of public policy -- is hard to overstate," Neil Bradley, the Chamber's policy head, said on Twitter.

The FTC proposal is based on a preliminary finding that noncompete clauses quash competition in violation of Section 5 of the Federal Trade Commission Act. Section 5 bans unfair methods of competition. 

It would apply to independent contractors and anyone who works for any company, whether paid or unpaid. It would also require employers to rescind existing noncompete clauses and actively inform workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, like nondisclosure agreements, but other types of employment restrictions could be subject to the rule if they are so broad that they function as noncompete clauses. It would also not apply to agreements between companies and their franchisees.

Protecting their investment

Employers who use noncompetes say they're needed to protect trade secrets or other confidential information employees might learn in the course of their jobs. 

"Employers will say these restrictions are necessary to foster innovation because we're losing employees all the time and they're taking information with them, so we can't innovate," Rahbar said. He noted that, even if the FTC ban takes effect, employers will have other tools, like confidentiality agreements, that would limit the information workers could potentially take from the company.

"This is going to cause, and it should, introspection on the part of employers about how to protect what they care about," he said. "With employees, that means paying them more, treating them better, and thinking how to incentivize someone to stay with you instead of banning them from leaving. Employers will have to work harder to keep their employees."

With reporting by the Associated Press.

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